Daily Commentary by Larry Baer 3.30.2012

Daily Commentary by Larry Baer:  Consumers went on a surprising spending spree in February - dipping into their savings to cover their purchases since their incomes were not strong enough to cover the costs associated with all of that buying.  Spending jumped 0.8% higher even though incomes improved by a modest 0.2%.  Consumers' shopping lists appear to have been heavily focused on durable goods (items manufactured to last three-years or more like TV's, washer and dryers, and cars) though spending accelerated across the board.  The consequence of this power shopping outburst was the savings rate dropped to 3.7%, only its fourth month under 4.0% since 2007.  

Mortgage investors were quick to discount ramped-up spending in February since it will be very difficult to sustain without a substantial gain in personal incomes - a shift not likely to occur anytime soon.  Taking inflation into account, the amount of income available to households after accounting for taxes and inflation fell 0.1% after a decline of 0.2% in January.  Since consumer spending represents approximately 70% of all domestic economic activity - the pace of growth in coming months will almost certainly remain pretty lethargic - a condition that should serve to retard the development of significant upward pressure on mortgage interest rates for several months yet to come.

In the run-up to next Friday's March Nonfarm Payroll report investors will get a look at conditions in the manufacturing sector when the Institute of Supply Management releases its March Manufacturing Index on Monday.  The ISM will return on Wednesday with the release of its March Service Sector Index.  The collective story expected from these two indexes is that overall growth in the economy was exceptionally limited last month.  If this assessment proves accurate, mortgage interest rates will likely roll into Friday's big employment report little changed from current levels.

Most economist expect the economy created 210,000 net new jobs last month while the national jobless rate remained unchanged at 8.3%.  Numbers that match or closely approximate the consensus estimate will likely prove supportive of steady mortgage interest rates.  The risk is that headline job creation exceeds 220,000 and/or the jobless rate slips to a reading of 8.2% or less - the probabilities are small that such an event will occur - but not so small that this event can be ignored.

FYI:  The mortgage market is usually closed on Good Friday - but to accommodate Friday's nonfarm payroll - this year trading will conclude early at 12:00 noon ET.  

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 3.29.2012

Daily Commentary by Larry Baer:  Earlier this morning the Commerce Department said its final revision to its "guesstimate" of the pace of fourth-quarter economic growth remained unchanged at 3.0%.  Details of the report showed the improvement over the last three months of 2011 was strongly underpinned by inventory rebuilding.  Excluding inventories, the economy grew at an unrevised 1.1% rate - a sharp step-down from the prior quarter's pace of 3.2%.  Corporate profits before-tax fell 0.4% quarter-over-quarter, down from a 1.2% increase in the third-quarter.  This is the first quarterly decline in profits since the fourth-quarter of 2010.  The economy's momentum has slowed this quarter amid signs of cooling in manufacturing, business spending and a pause in the housing recovery -- even as the labor market shows modest signs of improvement.  

According to a separate report from the Labor Department, the number of Americans standing in line to file first-time claims for government unemployment benefits fell 5,000 during the week ended March 24^th.  Many economists had anticipated this week's drop in jobless claims would be even greater.  I suspect the reason the decline in jobless claims was not stronger this time around (and why subsequent improvement in the jobless claims data may fall short of expectations) will prove to be the result of businesses becoming increasingly cautious about adding additional headcount to their payrolls until new convincing signs of accelerating economic growth both here at home and aboard are more evident.  If my assessment proves accurate, mortgage interest rates will not likely move above their mid-March highs for several more weeks yet.

The final Treasury auction on this week's economic calendar is today's sale of $29 billion worth of 7-year notes.  This offering will likely draw decent, but otherwise uninspiring demand from both domestic and foreign investors.  If so, it would not be unreasonable to expect mortgage investors to respond with a slightly mortgage unfriendly adjustment in either rate or price - or both.  

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 3.28.2012

Daily Commentary by Larry Baer:  The remaining two Treasury auctions on this week's economic calendar (today's $35 bil. 5-year note sale and tomorrow's $29 bil. 7-year note sale) will exert the largest single influence on the trend trajectory of mortgage interest rates -- at least through tomorrow afternoon at 1:00 p.m. ET when the final gavel falls on the sale of $29 billion worth of 7-year notes.    

In yesterday's ABC News on-the-record interview, Fed Chairman Bernanke said it is too soon to declare victory in terms of the budding economic recovery.  Mr. Bernanke welcomed a decline in the unemployment rate and signs financial strains in debt-stricken Europe were easing.  Asked whether the Fed was considering taking further action to stimulate economic growth, Bernanke said the central bank had not taken any option off of the table.  

If it was Mr. Bernanke's intent to try to "jaw-bone" interest rates lower - he was at least partially successful.  Investors responded to the Fed Chairman's warning to avoid becoming complacent by nudging mortgage interest fractionally lower.  But the power of "jaw-boning" by the Fed has it limits -- and chances are the mortgage market is rapidly approaching that mark -- at least on a short-term basis.   Heads up.

Daily Commentary by Larry Baer 3.27.2012

Daily Commentary by Larry Baer:  Different day - same story.

This week's Treasury Department sale of $99 billion worth of 2-, 5- and 7-year notes will likely exert the greatest influence on the short-term trend trajectory of mortgage interest rates.    Treasury will kick things off with the sale of $35 billion of 2-year notes today followed by $35 billion of 5-year notes tomorrow and they will wrap-up their borrowing spree with the sale of $29 billion of 7-year notes on Thursday.  If these three auctions draw decent demand - (an improved likelihood after yesterday's comments from Fed Chairman Bernanke reinforced the notion the Fed intends to leave their benchmark interest rates at super-low levels into 2014) -- mortgage investors will likely breathe a sigh of relief and push mortgage interest rates fractionally lower.  In the off-chance Uncle Sam is forced to "sweeten-the-pot" by dropping his price in order to attract the required capital - it is almost certain mortgage investors will respond by pushing their rates higher as well.   Each of these auctions will conclude at 1:00 p.m. ET and I will post results on the website as soon as possible thereafter.

FYI - The S&P/Case-Shiller composite index of single family home prices was unchanged on a seasonally adjusted basis in January.  It was the first time the index did not decline since July 2011 when prices were flat on a month-over-basis.  Details contained within the index indicate average home prices across the country have now retreated back to early 2003 levels.  

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 3.26.2012

Daily Commentary by Larry Baer: This week's Treasury Department $99 billion auction of 2-, 5- and 7-year notes will likely exert the greatest influence on the short-term trend trajectory of mortgage interest rates.    Treasury will kick things off with the sale of $35 billion of 2-year notes tomorrow followed by $35 billion of 5-year notes on Wednesday and they will wrap-up their borrowing spree with the sale of $29 billion of 7-year notes on Thursday.  If these three auctions draw decent demand (a 50-50 proposition at best as I write) mortgage investors will likely breathe a sigh of relief and push mortgage interest rates lower toward the end of the week.  If Uncle Sam is forced to "sweeten-the-pot" by dropping his price in order to attract the required capital - it is almost certain mortgage investors will respond by pushing their rates higher as well.   Each of these auctions will conclude at 1:00 p.m. ET and I will post results on the website as soon as possible thereafter.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 3.23.2012

Daily Commentary by Larry Baer: Sales of new homes fell 1.6% from the January pace according to figures released this morning by the Commerce Department.  On average, sales are up in the last three months compared with the three-month average ending in November -- indicating a faint flicker of life in this component of the housing sector.  Inventory levels remain 17% below their previous record low set in mid-1967.  It is unlikely new home sales will post consistent gains until the large number of distressed properties together with the shadow inventory of unsold homes is reduced substantially.  None of this news comes as a surprise to mortgage investors who gave the data little more than a passing glance.  

As I mentioned here yesterday -- investors are becoming increasingly concerned about the global economy after reports showed Chinese manufacturing slumped for a fifth month in March.  Factory activity in France and Germany also declined sharply this month, suggesting the euro zone is teetering on the edge of another recession.  

The "so what" factor here is pretty straightforward - if the global economy continues to slide back into recession - the budding economic recovery here in the states will soon begin to run into stiffening growth headwinds.  Should such a scenario develop -- look for strong selling in the stock markets to create a "flight-to-quality" flow of capital back into the relative safe-haven of Treasury debt obligations and agency eligible mortgage-backed securities - a process that almost always proves to be very supportive of the prospects for steady to perhaps fractionally lower mortgage interest rates.

Looking ahead to the coming week the Treasury Department's $99 billion auction of 2-, 5- and 7-year notes will likely exert the greatest influence on the short-term trend trajectory of mortgage interest rates.    Treasury will kick things off with the sale of $35 billion of 2-year notes on Tuesday followed by $35 billion of 5-year notes on Wednesday and will wrap-up their borrowing spree with the sale of $29 billion of 7-year notes on Thursday.  If these three auctions draw decent demand (a 50-50 proposition at best as I write) mortgage investors will likely breathe a sigh of relief and push mortgage interest rates lower toward the end of the week.  If Uncle Sam is forced to "sweeten-the-pot" by dropping his price in order to attract the required capital - it is almost certain mortgage investors will respond by pushing their rates higher as well.  

In my judgment Wednesday's February Durable Goods report, Thursday final revisions to the fourth-quarter 2011 Gross Domestic Product figures and Friday's February Personal Income and Spending data will all take a back-seat to the results of the Treasury auction.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME